In the introduction to this series on how to create a budget for your cosmetic product, we talked about the importance of building a comprehensive, realistic budget when making a plan to create a new beauty product.

In this article, we will look at the first step: How to calculate your Cost of Sale (COS), or Cost of Goods Sold (COGS).

What is COS?

The cost of sale (COS), or cost of goods sold (COGS), is the total cost to produce or purchase one unit of your product. You can think of COS as “hard costs” of your beauty product, which include expenses for physical components and labor once the product is fully assembled and ready for sale.

What Items Are Included in COS?

COS is calculated with direct expenses like material and labor needed to make one unit of your product. It does not include indirect expenses like sales or marketing.

In simplest terms, your COS is comprised of the following:

- The product/formula: These are the ingredients that go into your product if you’re having it formulated or making it yourself, or the cost to purchase an existing formula.

If you are creating a 50ml jar of moisturizing face cream, then you will want to work out how much the 50ml of product or formula inside the jar will cost. This cost will be your product/formula unit price.

Example: 50ml of face cream, where the cream has a cost of $20/kg, means you have $1 of product or formula in each jar – the first number to consider when calculating your COS.

- Packaging: This includes the bottle, jar, tube, or other container the product is sold in, plus any external packaging, which might include a carton, blister pack, or bag.

Sometimes packaging companies require larger orders than cosmetic creators need for their “lot size,” or the number of fully finished products they intend to produce. You may produce 1000 units of the moisturizing face cream, as mentioned above, but need to purchase 5,000 units of jars and lids. When calculating your COS, use the per-unit cost of your packaging (this may decrease over time, if you buy larger amounts of packaging).

But when calculating your overall budget, remember to adjust the totals to allow for minimum order quantities, so you can see how much investment will be needed upfront to purchase packaging and other materials. For example, the per-unit cost for a jar and lid may only be $0.20 cents per unit. But if you need to buy 5,000 at a time, your cost is still $1,000, whether you're bottling 100, 1,000, or 5,000 jars of product.

- Labeling/printing. Separate from raw packaging, this category includes printing on the container, on the external packaging and on any inserted leaflets, as well as adhesive labels if used.

There may be extra fees for first-time labeling or printing jobs, due to machine set-up or administrative costs. Just like the packaging example above, use the real unit cost when calculating your COS. But remember to include all costs in your overall budget, if there are additional set-up or “start-up” fees at the beginning.

How Do I Calculate the Cost of Each COS Item?

If you are purchasing a turn-key cosmetic from a manufacturer or private label provider then you may not need to calculate COS – you can use the purchase price per unit from the supplier. However, if you are managing your cosmetic development project and are purchasing individual components, then you may be able to break down your COS into line items (ie. formula cost/unit, packaging cost/unit, label cost/unit, etc.)

Since each COS component is present in every single unit of product you sell, figuring out the cost of each component per unit is a question of simple division or multiplication.

Here are some examples:

• The hyaluronic acid in your face serum costs $0.10 cents per tube. If you want to create a start-up batch of 200 tubes of serum, that’s a fixed cost of $20 per batch.

• The minimum order of recycled paper cartons for your tubes of face serum is 250, at a cost of $150. So each carton costs you .60 cents apiece. You’ll be left with 50 extra cartons, but hopefully you’ll be restocking your serum soon!

• The printer wants $500 to digitally print your brand info on 200 tubes, print 200 labels for the cartons, and print a leaflet for inside the carton. This comes out to $2.50 per unit.

Repeat this formula for every ingredient, packaging component and printing cost associated with your first batch, and you’ll have a precise figure for COS.

How Do I Know If My COS is Too High?

The question of whether your COS is too high or not depends on your SRP – your suggested retail price – and your goals.

The difference between your COS and your SRP is called the gross margin, and if it is big enough to cover costs for marketing, sales, logistics, and overhead – and also allow for some profit – then you don’t have a problem.

But if your gross margin does not allow you to support business growth, including the production and reproduction of new products, then you could consider lowering your COS, or charging more for your product! Low volume productions are often “artisanal,” and can be sold with a maker’s story such that higher retail prices are accepted by consumers.

To lower your COS, you can try cutting down on individual component costs or try increasing your volumes – the latter has the effect of lowering the per-unit price.

Where Can I Save Money on COS?

In a word: packaging.

While it’s true that packaging is often “the first line of sale” – the first thing that people see when considering a purchase, it’s also one of the costlier elements of a product.

Fancy boxes, metallic printing, and unique accessories can make up to a whopping 70% of your COS! That’s another reason why it’s so important to understand your COS and find places to save money.

Fortunately, the trend is toward more minimalist, eco-friendly packaging, which can also be a cost-saver. By eliminating outer boxes or printing directly on boxes instead of stuffing the boxes with leaflets and marketing materials, you can save money on COS, do the environmentally responsible thing, and help establish your brand as an eco-conscious one.

Packaging is only one area where beauty brands tend to spend a lot. But, like cosmetics development, budgeting is its own art form – so get creative! If saving money is the objective, then you may try cutting volumes, or waiting on things like trademarks, proprietary formulation, or agency-led branding. You may try starting small and “lean,” in order to test the market and make investments according to how (and when!) the market responds to your products.

Why You Can’t “Guesstimate” COS

COS is a question of math, and numbers don’t lie. Calculating your COS might be the most tedious part of your cosmetic product creation journey. But understanding your cost of sale is an essential starting point to planning a financially viable product and business strategy.

Unless you have years of industry experience, “guesstimating” your COS is risky and could come back to bite you.

Better to do the work on the front end by creating a spreadsheet that spells out all your COS and helps you develop a clear picture of how much you’re spending, how much you stand to profit, and where you can cut expenses.